Steel Products Prices North America

Cliffs Stronger than Expected

May 1, 2015

Despite significant decreases in iron ore, steel, and metallurgical coal pricing, Cliffs Natural Resources, Inc. was able to achieve revenue of $446 million (excluding North American Coal) with adjusted EBITDA of $94 million. US iron ore shipments of 2.9 million tons were less than the 4 million anticipated, but in the US iron ore business (USIO) $105 million of EBITDA was achieved in the first quarter.

Cliffs has been aggressive in reducing costs and saw positive results across all three reporting segments for first quarter.

Despite the “irrational low prices imposed by two Australian majors,” USIO realized a price of $93/ton in the first quarter, said CEO Lourenco Goncalves. This was due to 1) custom made blast furnace-ready pellets instead of sinter feed lines, 2) the fact that there are no sintering plants in the US and sinter feed fines cannot be sold in the US, and 3) long-term contracts.

None of Cliff’s contracts will expire for at least seven quarters and two expiring in Dec 2016 and Jan 2017 will be renewed ahead of expiration date. The company expects to renew its expiring Dec 2016 contract with ArcelorMittal on good terms.

Goncalves admitted that ArcelorMittal’s “crazy experience with Essar Minnesota” in the past can be blamed on Cliff’s attitude pre-Goncalves which “when they needed Cliffs badly, Cliffs turned their back to AK Steel.”

“I believe in the U.S. iron ore business. I believe that supporting the clients in the United States is the reason why this business exists, and we are working day-by-day with ArcelorMittal USA to develop the product that will take to the next 10 years…”

The North American Coal operating segment was classified as held for sale as of March 31, 2015. The Bloom Lake iron ore operation is under CCAA Protection and plans are being made to sell the asset. Cliffs does not expect any exposure to Bloom Lake creditors during the CCAA process

“Among the several steps taken, the most relevant one was the CCAA filing by the Bloom Lake Group,” said Goncalves. “Had we not stopped the bleeding at Bloom Lake, this Q1 conference call would certainly be a lot different.”

Cliffs is exploring options to enter the EAF market and is working with the state of Minnesota to develop a DRI plant to supply Midwest mini mills.

“As a market leader in value-added iron ore pellets, these will open up a new opportunity for us to diversify our product mix and add new customers to USIO beyond the traditional blast furnace clienteles

Cliffs has lowered its 2015 outlook for sales and production for USIO to 20.5 million tons of iron ore pellets. AISO production will be maintained at 11 million tons. SG&A expenses has been lowered $20 million to $120 million. The capital expenditure budget has been reduced $25 million to $125 million.

Goncalves warned that Australian and Brazilian iron ore producers have decisions to make on how they will continue to operate. “In sum, none of the three majors can continue to support their massive CapEx needs without allowing iron ore price to increase, and if they still decide to keep iron ore prices artificially low as they had been doing so far, their advertised massive capacity increases will not materialize due to insufficient cash flow generation.”

Goncalves says that contrary to media reports, Cliffs is not going to idle their Asian Pacific Iron Ore (APIO) operations.

“We are going to pursue BHP and Rio. If they continue to go down or continue to go down, the difference is that I have no commitment to stay in Australia, and they have the full commitment to stay in Australia, so everything that they do is consequence. Everything that we will I only do, replicate what they are doing, so I would be there worse nightmare, because I know that their game plan is not to shut down Cliffs Koolyanobbing.”

Goncalves added, “What I am saying is that I will be like that parasite that will continue to be there sucking their blood through the very end.”